Multiple Choice Answers

1. Nelson Company’s activity for the first six months of 2004 is as follows:
Month         Machine
Hours
Electrical
Cost
January        4,000 $3,120
February      6,000 4,460
March          4,800 3,500
April  3,800 3,040
May   3,600 2,900
June   4,200 3,200
Using the high-low method, the variable rate per machine hour would be  $.40
$.65
$.67
$.70
2. In the decision to replace an old machine with a new machine, which of the following would be considered a relevant cost?
The current disposal price of the old equipment
The loss on the disposal of the old equipment
Depreciation expense on the old equipment
The book value of the old equipment

3. Clarkson Industries produces an electronic calculator that sells for $75 per unit. Variable costs are $45 per unit and fixed costs are $150,000 annually. The company has been averaging an annual income of $100,000 over the past five years. The break-even point for Clarkson Industries would be:
2,000 units.
3,333 units.
5,000 units.
10,000 units.
4. Contribution margin is the amount remaining after
variable expenses have been deducted from sales revenue.
fixed expenses have been deducted from sales revenue.
fixed expenses have been deducted from variable expenses.
cost of goods sold has been deducted from sales revenues.
5. The Pohl Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of machine hours. For June, the company’s manufacturing overhead flexible budget showed the following total budgeted costs at a denominator activity level of 20,000 machine hours:
Variable overhead  $26,000
Fixed overhead 30,000
During June, 17,000 machine hours were used to complete 13,000 units of product, and the following actual total overhead costs were incurred:
Variable overhead  $25,330
Fixed overhead 28,820
At standard, each unit of finished product requires 1.4 hours of machine time.
The fixed overhead budget variance for June was:
$3,230 F.
$3,230 U.
$1,180 F.
$1,180 U.

6. Newmax Co. is a manufacturing business. When it pays the workers who assemble its products, the cash account should be decreased and what account should be increased?
Cost of goods sold
Work-in-process inventory
Manufacturing overhead
Finished goods inventory

7. The Talbot Company produces wheels that are used in the production of bicycles. Talbot’s costs to produce 100,000 wheels annually are:
Direct materials      $ 30,000
Direct labor  50,000
Variable overhead  20,000
Fixed overhead      70,000
Total $170,000
An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels were purchased from the outside supplier, $15,000 of annual fixed factory overhead could be avoided.
What is the highest price that Talbot could pay the outside supplier for the wheel and still be economically indifferent between making or buying the wheels?
$1.70
$1.15
$1.00
$ .80
8. The cost of goods sold in a merchandising firm typically would be classified as a
variable cost.
fixed cost.
mixed cost.
step-variable cost.

9. Questions 9 and 10 refer to the following:
Jones Co. is considering buying a machine that cost $100,000. If purchased, Jones believes the new machine will reduce its operating cost by $20,000 per year for the next 10 years. At the end of 10 years the machine will have $0 salvage value. If acquired, Jones will depreciate the machine using the straight-line method.
Jones’ cost of capital is 12%. From present value tables, Jones had identified that the present value factor for an amount of 1, discounted at 12%, is .322, while the present value of a 10 year annuity of 1, discounted at 12%, is 5.65.
Ignoring income taxes, what is the payback period of this project?
5.0 years
4.5 years
4.4 years
4.0 years

10. Ignoring income taxes, what is the net present value of this project?
$ 5,760
$ 6,440
$12,200
$13,000

11. The individual generally responsible for explaining the direct-labor efficiency variance is the:
the purchasing agent.
the sales manager.
the production manager. LINDA
the industrial engineering department.

12. Allen Company collects 25% of a month’s sales in the month of sale, 70% in the month following sale, and 4% in the second month following sale. The remainder is uncollectible. Budgeted sales for the next three months are:
April  May June
Budgeted sales  $100,000 $120,000 $110,000
Cash collections in June are budgeted would be:
$115,500.
$111,000.
$110,000.
$113,400.

13. Young Enterprises has budgeted sales in units for the next four months as follows:
June  10,000 units
July 8,000 units
August 12,000 units
September 14,800 units
Past experience has shown that the ending inventory for each month should be equal to 20% of the next month’s sales in units. Budgeted production for July should be:
8,800 units.
8,400 units.
8,000 units.
7,200 units.
14. The Collins Company applies overhead to production orders on the basis of machine hours. At the beginning of 2002, the company made the following estimates:
Estimated Amount
Direct labor cost $100,000
Indirect labor cost 25,000
Advertising expense 30,000
Direct materials 50,000
Indirect materials 10,000
Depreciation on factory equipment 40,000
Machine hours to be worked 10,000
What predetermined overhead rate should Collins Co. use?
$ 3.50
$ 7.50
$ 9.00
$12.00

15. The purpose of a flexible budget is to:
reduce the total time in preparing the annual budget.
compare actual and budgeted results at virtually any level of production.
eliminate cyclical fluctuations in production reports by ignoring variable costs.
allow management some latitude in meeting goals.
16. Following is information relating to Kew Co.’s Vale Division for 2001:
Sales $500,000
Variable expenses  300,000
Fixed expenses      50,000
Average operating assets 1,000,000
Minimum desired return  12%
What was Vale’s residual income?
$120,000
$150,000
$ 30,000
$ 80,000

17. The labor time required to assemble a product is an example of a:
Unit-level activity.
Batch-level activity.
Product-level activity.
Facility-level activity.
18. Anola Company has two products: A and B. The company uses activity- based costing to determine product costs. The estimated overhead costs and expected activity for each of the company’s three overhead activity centers are as follows:
Activity
Center

Estimated
Overhead
Costs
Expected Activity
Total  Product A    Product B
Activity 1     $18,000       500    300    200
Activity 2     $16,000       600    500    100
Activity 3     $27,000       900    600    300
The predetermined overhead rate under the activity-based costing system for Activity 3 is closest to:
$30.00.
$30.50.
$90.00.
$67.78.

19. A standard is:
unrelated to budgeting since standards are used for control purposes only.
normally set at the ideal rather than the practical level of cost, efficiency, or quantity.
normally not applied to the variable portion of overhead.
the budgeted cost for one unit of product.

20. Which of the following would be most appropriate for evaluating a cost center?
Return on investment
Contribution margin percentage
A static budget
A standard costing system